Not ‘A Shred of Evidence’ to Support Reinhart and Rogoff

Posted on May 31, 2013

The Harvard professors who led much of the Western world into austerity with their 2010 paper “Growth in a Time of Debt,” debunked in April by a University of Massachusetts grad student, have taken another hit, this time from two economists with the University of Michigan.

“Here is the bottom line,” wrote economics professor Miles Kimball and undergraduate student Yichuan Wang, in a paper that examined data pulled from Reinhart and Rogoff’s controversial study to determine whether large federal debts inevitably stunt economic growth, as the Harvard economists had claimed.

“Based on economic theory, it would be surprising indeed if high levels of national debt didn’t have at least some slow, corrosive negative effect on economic growth. And we still worry about the effects of debt. But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.”

The math is tricky and doesn’t lend itself to a short blog post. So readers who want to dig deep into the details of Kimball and Wang’s paper should click here.

Another paper by University of Massachusetts professor Arindrajit Dube appears to show that Reinhart and Rogoff had the relationship between growth and debt exactly backward: Slow growth appears to cause higher debt, not the other way around.

The human costs of the economists’ error have been cataclysmic for millions of Europeans. It will be for millions of Americans as well if politicians continue to insist, in spite of multiple falsifications of the claims underlying austerity, that the spending of tax revenue on the public welfare—rather than for the luxury of bankers and investors—is a recipe for national economic ruin.

We don’t want anyone to take away the message that high levels of national debt are a matter of no concern. As discussed in “Why Austerity Budgets Won’t Save Your Economy,” the big problem with debt is that the only ways to avoid paying it back or paying interest on it forever are national bankruptcy or hyper-inflation. And unless the borrowed money is spent in ways that foster economic growth in a big way, paying it back or paying interest on it forever will mean future pain in the form of higher taxes or lower spending.

… But even if debt is used in ways that do require higher taxes or lower spending in the future, it may sometimes be worth it. If a country has its own currency, and borrows using appropriate long-term debt (so it only has to refinance a small fraction of the debt each year) the danger from bond market vigilantes can be kept to a minimum. And other than the danger from bond market vigilantes, we find no persuasive evidence from Reinhart and Rogoff’s data set to worry about anything but the higher future taxes or lower future spending needed to pay for that long-term debt. We look forward to further evidence and further thinking on the effects of debt. But our bottom line from this analysis, and the thinking we have been able to articulate above, is this: Done carefully, debt is not damning. Debt is just debt.